Dive Brief:
- Nearly two thirds (58%) of companies from the S&P Composite 1500 Index — which covers approximately 90% of the market capitalization of U.S. stocks — are incorporating ESG into their CEO performance metrics, up from 23% in 2019, global insurance broker and advisory firm WTW told reporters Tuesday.
- Alex Ha, WTW’s director of executive compensation and board advisory, said the use of ESG underwent a more “dramatic increase” despite the use of other non-financial strategic measures going down. If companies incorporated ESG into their annual incentive plans, they typically did it in place of other non-financial measures, which have historically accounted for no more than 20% of such strategies, he said.
- Some 7% of S&P 500 companies introduced or added another ESG metric into their incentive plans, while 5% of S&P 500 companies modified the use of such metrics, according to WTW’s research. Modifications included changes in metric weightage, revising environmental, social and governance goals or removing these targets altogether from incentive plans.
Dive Insight:
Executive pay inched upwards by 3% year over year in 2023, while earned bonuses dropped 6.4%, the British-American insurance services provider — formerly known as Willis Towers Watson — reported during its webinar. Total earned pay also increased 4.5% in 2023, according to WTW.
Despite the increase in ESG metrics as part of executive performance benchmarks, ESG isn’t being adopted more widely overall because of the Supreme Court’s ruling on affirmative action last year and scrutiny surrounding the legality of diversity, equity and inclusion programs, Ha said.
However, WTW’s executive pay consultants said there is still strong support for tying climate objectives to executive incentive plans. Kenneth Kuk, a senior director at WTW, said the percentage of S&P 500 companies in the U.S. that have some kind of climate metric in their incentive plan jumped to almost 45% this year, up from 14% three years ago.
ESG has faced some blowback in the U.S., but companies with global operations face pressure from European investors and consumers to meet sustainability commitments, Kuk said.
Diversity, equity and inclusion
Though the Supreme Court’s affirmative action ruling affects college admissions, WTW’s advisers pointed to how U.S. companies with DEI programs may be at risk of litigation in its aftermath.
The risk, according to Kuk, is highest when there are representational quotas, or numeric goals for demographic groups.
“Organizations will have to have the right infrastructure to make sure that they can show … that DEI programs are meant to remove bias and not to introduce bias,” Kuk said. He noted that executive pay programs including representational goals could be at risk of litigation.
The degree of risk, however, is linked to the overall alignment of DEI with a company’s business strategy, according to Becky Huddleston, managing director and co-leader of executive compensation and board advisory practice at WTW.
“Some companies are staying the course and making no changes to the way DEI is incorporated into their incentive plans, so that means continuing with quantitative metrics for some, and continuing with qualitative metrics for others,” she said. Huddleston noted that some companies have removed the metric entirely, indicating that DEI has been “ingrained into their culture” and, hence, no longer feel the need to include it as an incentive plan metric.
Others, she noted, fall somewhere in the middle and are still including DEI in their incentive plans but are moving from quantitative to qualitative goals, or revising the metric to reflect a broader set of outcomes.
Complying with climate disclosure rules
Despite a pause in the implementation of the Securities and Exchange Commission’s climate disclosure rule, which the agency stayed as it works through legal challenges, WTW recommended companies move forward with planning and preparation to comply with climate disclosure laws and regulations, especially as the European Union’s Corporate Sustainability Reporting Directive and California climate laws take effect.
California climate laws require “an assessment of your climate risks, as well as scope one, two and three emissions reporting and then finally, the EU's Corporate Sustainability Reporting Directive impacts about 50,000 public and private companies, and despite it being a EU directive, it impacts about 3,000 U.S. companies that have operations in the EU,” said Holly Teal, climate practice leader for North America at WTW.
She added that companies also need to ensure they have sufficient board oversight frameworks to meet the requirements of these laws and regulations.
“And while challenging, the role of the board to oversee and be accountable for the assessment, the management and the integration of material climate risks and opportunities is even more important, given the inconsistency of these regulations,” Teal said.
